Thursday, 30 June 2011

This is my first post. Given my particular research interests (law and economics, comparative law, judicial behavior), I will focus on legal reform and the impact of the Memorandum of Understanding (MoU) on the Portuguese legal system. Two initial quick notes:

(I) As I wrote in a document compiled by Nova, the MoU failed to grasp the complexity of problems faced by the Portuguese legal system. As a consequence, it is technically deficient and potentially counter-productive (for example, eliminating backlogs by June 2012 is simply unfeasible and undermines the credibility of the whole plan). Furthermore, the proposed reform of court districting is based on a clear misunderstanding: Portugal is NOT eliminating 200 courts but rather concentrating the management of such courts, which is a very different issue.

(II) The Portuguese court system is not worse than the Spanish, the Italian, the Greek or the French court systems (probably better according to the numbers produced by the World Bank Governance Indicators and the World Bank’s Doing Business). It is certainly better than most Central and East Europe, Latin America, Africa and China. Blaming the legal system for lack of FDI and economic growth is simply misplaced and a myth that covers other structural determinants. In fact, the inefficiencies of the Portuguese legal system are more likely to impose significant costs to small domestic investors and firms than to foreign investors and multinationals (they use international commercial arbitration anyway).

1. It's one of the smallest cabinets ever: 12 ministers, including the PM, and 35 "junior ministers" - secretários de estado (the previous cabinet had 17 ministers and 38 junior ministers). Not the smallest ever, though, if you add ministers and junior ministers. That record (assuming one thinks this is a good thing, although I'm somewhat more agnostic there) belongs to the current President, Cavaco Silva, who in 1985 led a cabinet formed just by 14 ministers and 32 junior ministers. It surprises me a bit that, historically speaking, there is no relation between cabinet size and whether a government is supported by coalition or not. Average of 56 for coalition governments, average of 57 for single-party governments. In any case, this is a small cabinet by any standards.

2. There are eight women (two of them senior ministers), less than one out of five cabinet members. But the previous cabinet had nine women, which was proportionally even less (albeit five of them were senior ministers). Overall, the average of women cabinet members from 1976 until now is about 6% (but rising), so this cabinet is clearly in the upper half in terms of female cabinet participation in Portugal. It is also apparently not far from the European average, although much below than, well, you know where (Scandinavia in case you really didn't know).

3. Judging from newspaper reports, of the 47 cabinet members, 18 are affiliated to the PSD, 11 to the CDS-PP and there are 18 "independents". There's been a lot of talk about the large number of independents (nearly two out of five in this cabinet), but two notes are necessary. First, this is a very broad definition of "independence", which encompasses, for example, MP's included in party lists although unaffiliated to the party. Second, this is far from a new trend. The average of "independents" per cabinet since 1976 is one out of four, and they represented 35% of the 2005-2009 Sócrates cabinet. So the 19th government has a high share of independents - the highest ever, I think, if we discount our "presidential initiative cabinets in the 1970s - but not inordinately so for Portuguese standards. It is a pattern also shared with Spain, and that sets us apart from most European democracies, as far as I can tell from the literature.

4. I would need much more time to look at educational backgrounds, since vitas of all the cabinet members are not available in the government's website. But among the senior ministers, half of them are lawyers (typical in cabinets of the Right) and five are Business or Economics majors (with two of them Economics PhDs and another a Mathematics PhD). I don't recall a cabinet where not a single senior minister was an Engineering major (somebody made a joke the other day that this was a revenge against you know who). And hey: there's one Political Science major.

For scholarship on the composition of cabinets in Portugal, this is probably a good place to start.

Tuesday, 28 June 2011

Here is a link to a piece published by Publico last Sunday. The readers of the blog will not find anything new, but I thought it would be useful to have a summary in Portuguese on the challenges posed by the external adjustment ahead.

Monday, 27 June 2011

Three former authors of this blog are now in the new Portuguese government, namely, Álvaro Santos Pereira (Minister for the Economy), Pedro S. Martins (Secretary of State for Employment), and Miguel Morgado (Political Advisor to the Prime Minister). We expected of course a larger number of departures and promise to do best in the future. In any case, we wish our former co-bloggers lots of good luck and courage and will certainly miss their posts. We promise that we won't be too severe on their new roles... at least during their first 100 days.

This last paragraph also deserves a quick comment. Portuguese authorities and politicians should not be obsessed with image in the outside of the country; just focus on what has to be done, and Portugal will be out of the news. Portugal is sufficiently small to be news only when things go wrong.

Thursday, 23 June 2011

The current economic problems in Greece, Ireland and Portugal demanded rescue plans.

The application of rescue plans is a political issue as much as it is an economic one.

Portugal has just elected a new Parliament. A majority Government has been formed with an alliance of two parties, providing a stable support for 4 years. More importantly, the three main parties all have declared, during the recent electoral campaign, the support to the Memorandum of Understanding with EC/ECB/IMF. The other parties have clearly advocated a different course of action, and have overall lost votes. It is fair to say that most of the population supports the MoU. The impact of it may be feared by many, but this was the road chosen by the majority of the population.

As the new Government is from the right-wing of the political spectrum, it is expectable that left-wing unions and parties will try to create civil unrest, which most likely will produce news outside Portugal. Still, and at the risk of repeating it, this will come from a minority.

Hopefully, outsiders will see through what may be news in the international media.

In this respect, Portugal and Greece populations are, apparently, behaving very differently (at least for the time being).

Greece is under some civil unrest, according to the news in the international media, which may actually provide a wrong picture, it would be nice to have a reference blog on the greek economy that gives a clear view on this, any suggestion from our readers and friends from Greece?

Anyway, the MoU demands that politics meets economics, and both must meet the international media, I hope that an accurate picture of the country can be given.

Friday, 17 June 2011

A couple of day ago, I wrote here about the ideal characteristics of the new minister of Finance: (i) deep knowledge of the deep workings of the public administration, (ii) Volcker-like determination on the goal (hit the deficit targets) while resisting the temptation to place public finances above the economy, and (iii) sharp knowledge of economic theory to be able to distinguish the good and bad ideas in this time of great change.

With Vitor Gaspar announced as the new minister, how did Passos Coelho do in his choice?

On (i), I don't know. On the positive side, Vitor has worked in the Ministry of Finance in the past, but it was a long time ago. On (ii), he was a phenomenal head of research at the ECB when the institution started, creating a great department out of nothing, well focused on what mattered. The challenge is of course now much greater, and Vitor's strength to stay focussed is going to be tested more than ever, but there is reason for optimism. On (iii), the choice could hardly have been better. In his combination of analytical knowledge of theory plus a good sense of pragmatism plus a generally sensible approach to using the little that we know about the economy, it is hard to think of too many Portuguese economists that are clearly better.

Good luck to our friend of this blog, Álvaro Santos Pereira, in his new role

in the Portuguese Government. :D

And of course to all of the new cabinet.

A quick assessment (of a few ones):

Vitor Gaspar - Minister of Finance - large economic policy experience in Europe and Portugal, very knowledgable about the portuguese economy and the relation with the EU; unexpected, but logical choice.

Nuno Crato - has over the years expressed clear and strong opinions about education, it has now the chance to "do it"

Paulo Macedo - better known for his previous work in Government, highly-qualified manager, a required skill for the coming years in the health sector.

Overall, a relatively young Government, something that is refreshing. A good start, I would say.

Thursday, 9 June 2011

A while ago, I wrote that the global financial crisis had sharpened risk perception and unearthed weaknesses in the EMU construct. These two factors have precipitated a crisis in euro peripherical countries with weak economic fundamentals. The response of governments and European institutions has been centered on two pillars: 1)the implementation of national policies by individual members, 2) a financial support (conditional on 1) from the other member countries to shield the periphery from speculative attacks.

This is not the first time that the European integration construct faces challenges. Jump back in time to the 1992-1993 crisis of European exchange-rate mechanism (ERM). Members had experienced different path in unit labor costs (divergence), there had been a (very) large assymetric shock (Germany reunification), the European political project was perceived as weaker (French and Danish referendum) and European leaders unable to coordinate (Bath summit).

The next graphs show the case of Italy during the EMS crisis. I use this case to make two points.

The first is that Italy was ultimately able to adjust without external help thanks to, an ambitious fiscal consolidation, structural reforms and privatizations (circa 10% GDP). However in that case as in many others the forced devaluation of the Italian lira improved the trade balance and contributed significantly to the success of the adjustment.

The second is on coordination. The 13 years of ERM existence at the moment of the crisis had pushed members to design effective procedures to coordinate the setting of the exchange rate parities. In the best European tradition, the decision of setting central rates required unanimous approval. Unfortunately the “un pour tous, tous pour un” approach is designed for a group that stays loyal to each other through thick and thin. The latter is not the best description of European leaders during the EMS crisis when realignment became “a dirty word in Bath.” In absence of multilateral consensus, Italy and Germany had to bilaterally propose that the Lira would devalue by 3.5% and the Mark revalue by 3.5% against all currencies in the ERM. Some members refused. The lira was initially the only currency to be devalued (by 7%). Ultimately the lira took a leave from the ERM to reenter a few years later with a currency devalued by 30%.

Today the absence of a nominal devaluation implies that the adjustments are more difficult. The number of national policies that can emulate the effects of a devaluation and help the adjustment of external imbalances is reduced.

A possibility is to use neutral tax swaps. In a recent work I have looked to the effects of a “fiscal devaluation,” namely a decrease in labor taxes balanced by an increase in consumption taxes. It is not a perfect substitute of a nominal devaluation: it has advantages, such as no adverse effect from foreign denominated debt (different situation from 1992), and has disadvantages, such as the difficulty to implement it compared to a currency devaluation. Nevertheless, it is a policy that aims at reducing external imbalances within a currency area. The existence of policies that can achieve a devaluation or a revaluation (do the opposite: decrease consumption tax, increase labor tax) within the currency area suggests that such policies require coordination between members. Here the lessons learned during the ERM period can prove useful. During the ERM, in front of imbalances, European finance ministers were changing parities between exchange rates. During the EMU, in front of imbalances, European finance ministers could change the composition of their tax rates. In the “un pour tous, tous pour un” world this would imply that EMU members with large and persistent trade deficits should fiscally devalue, while members with large and persistent trade surpluses should fiscally revalue.

Another possibility would be to increase the fiscal integration of the union and allow for implicit or explicit fiscal transfers between members (many good proposals have been advanced). Realistically it is a medium run perspective. Monetary union required decades, fiscal union will not be made in a week nor in a year.

We have experienced that in our journey towards European economic integration and convergence, imbalances continue to appear. Now we need these imbalances to be controlled using policy instruments that are coherent with the degree of national sovereignty determined by political constraints. Ultimately we need to accept that these imbalances matter.

Wednesday, 8 June 2011

Nearly 90% of the new parliament corresponds to MP's of parties that supported the memorandum. And the most voted party was arguably the one closest to the policies dictated in that document. These outcomes add considerable legitimacy - and momentum - towards the fulfilment of the challenging but long overdue reforms imposed by the troika.